Aldous v. Darwin National Assurance Co., No. 16-10537 (5th Cir. 2017)

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifh Circuit
FILED

March 16, 2017
No. 16-10537
Lyle W. Cayce

Clerk

CHARLA ALDOUS; CHARLA G. ALDOUS, P.C., doing business as Aldous
Law Firm,

Plaintiffs - Appellants Cross-Appellees

v.

DARWIN NATIONAL ASSURANCE COMPANY,

Defendant - Appellee Cross-Appellant

Appeals from the United States District Court
for the Northern District of Texas

Before REAVLEY, ELROD, and GRAVES, Circuit Judges.
REAVLEY, Circuit Judge.
Litigation over two trusts begat litigation between the prevailing party,
Albert Hill III, and his attorneys. Appellant Charla Aldous is one of those
attorneys, and she prevailed against her erstwhile client. In addition to
establishing an entitlement to significant attorney’s fees, Aldous and her
cohort also successfully defended against breach of contract and professional
negligence claims, among others. Hill’s claims against the attorneys triggered
insurance coverage provided by appellee Darwin National Assurance, Co.,
Aldous’s insurer. And now, in this third layer of litigation, we confront the
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resulting coverage dispute. Aldous claims Darwin did not pay enough to fully
cover the costs of her defense. Darwin asserts it paid too much.
This case was decided in favor of Darwin on summary judgment. In a
ruling that effectively doomed Aldous’s claims, the district court ruled she was
judicially estopped from claiming defense costs in excess of $668,068.38.
Building on this ruling, the district court further found that Darwin was
entitled to recover “overpayments” on an equitable “money had and received”
theory. Aldous appealed.
In addition to issues raised by the district court’s summary judgment
ruling, we are also called upon to decide whether the district court erred in
partially granting a motion to dismiss brought by Darwin. Lastly, Darwin has
filed a cross-appeal, contending that judgment should not have been granted
in favor of Aldous with respect to a breach of contract claim.
I. BACKGROUND
Along with Lisa Blue and Steve Malouf, Aldous represented Hill in
litigation that resulted in a judgment for their client valued at $114,745,870.
(The association of lawyers Blue, Aldous, and Malouf are hereinafter referred
to as “BAM.”) BAM represented Hill on a contingency basis, but Hill did not
want to pay. Litigation ensued. After BAM sued Hill, Hill counterclaimed,
alleging breach of fiduciary duty, duress, breach of oral contract, fraud, and
professional negligence.
Aldous had a valid professional liability insurance policy through
Darwin (the “Policy”), and Hill’s counterclaims triggered coverage. Blue and
Malouf were also covered under separate policies through separate insurers.
BAM had already retained Alan Loewinsohn to represent its affirmative claims
against Hill and requested that the insurers allow Loewinsohn to handle the
defense as well. The insurers relented. The various parties agreed (and
continue to agree) that Darwin is responsible only for one-third of the covered
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costs of defense; Blue and Malouf (or their insurers) were separately
responsible for their one-third shares.
BAM ultimately prevailed against Hill, securing an award of
$21,942,961 in earned attorney’s fees (offset by $691,175.93), costs of
$479,595.67, and the “reasonable costs and fees in defending against Hill III’s
counterclaims in the amount of $2,586,560.11.” By the time judgment was
entered, Aldous and Darwin were already embroiled in this coverage dispute.
Aldous filed this suit in Texas state court, and it was removed to federal
court on the basis of diversity jurisdiction. As relevant here, Aldous alleged
breach of contract, breach of the duty of good faith and fair dealing, violations
of the Texas Insurance Code, and violations of the Texas Deceptive Trade
Practices Act. She also sought a declaratory judgment that Darwin is liable
for the costs associated with the prosecution of her affirmative claims against
Hill to the extent those affirmative claims were inextricably intertwined with
her defense. Darwin counterclaimed, alleging (among other things) breach of
contract, unjust enrichment, and money had and received. The district court
partially granted a Rule 12(b)(6) motion filed by Darwin, dismissing Aldous’
breach of the duty of good faith and fair dealing claim, as well as a Texas
Insurance Code § 541 claim and the Texas Deceptive Trade Practices Act claim.
Subsequently, the parties filed cross-motions for summary judgment.
On summary judgment, the district court ruled largely in favor of
Darwin. In a ruling with major consequences, the district court ruled that
Aldous was judicially estopped from claiming that the costs in defending
against Hill’s counterclaims exceeded $668,068.38. This ruling meant that
Darwin’s coverage obligations were limited to $222,689.44—one-third of the
total cost to defend. Darwin had paid Aldous far more than that, $502,364.59.
Based on this ruling, Aldous’ breach of contract claim necessarily failed. The
judicial estoppel ruling also meant that Darwin had overpaid, and the district
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court ruled that Darwin could recover this overpayment through an action for
money had and received. The district court further ruled that Aldous was not
entitled to costs related to the prosecution of her affirmative claims against
Hill, even if she could show those affirmative claims were inextricably
intertwined with her defense against Hill’s counterclaims. And, as clarified in
a subsequent order, the district court granted summary judgment against
Darwin with respect to its breach of contract counterclaim, reasoning that the
anti-subrogation rule prevented it from asserting subrogation rights against
its own insured.
II. STANDARD OF REVIEW
Summary Judgment. Summary judgment rulings are subject to de
novo review. Cal-Dive Int’l, Inc. v. Seabright Ins. Co., 627 F.3d 110, 113 (5th
Cir. 2010). “We will affirm the district court’s judgment if no genuine issues of
fact are presented and if judgment was proper as a matter of law.” Id. On
cross-motions for summary judgment, we consider “each party’s motion
independently, viewing the evidence and inferences in the light most favorable
to the nonmoving party.” Morgan v. Plano Indep. Sch. Dist., 589 F.3d 740, 745
(5th Cir. 2009).
Motion to Dismiss. Dismissal for failure to state a claim is also
reviewed de novo. Colony Ins. Co. v. Peachtree Const., Ltd., 647 F.3d 248, 252
(5th Cir. 2011). Dismissal is appropriate if, assuming the truth of all facts
alleged in the complaint, the plaintiff is not entitled to relief as a matter of law.
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009); see Fed. R.
Civ. P. 12(b)(6).
III. DISCUSSION
A. Judicial Estoppel
As the parties understand, the district court’s judicial estoppel ruling
had major ripple effects. It is the foundation of the grant of summary judgment
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in favor of Darwin’s equitable claim for relief, and it precludes Aldous from
establishing any breach of contract. As we will see, however, the foundation is
faulty. Application of judicial estoppel was inappropriate.
Texas law governs the substance of this dispute, but “we apply federal
principles of judicial estoppel.” RSR Corp. v. Int’l Ins. Co., 612 F.3d 851, 859
(5th Cir. 2010). There are two basic requirements: “First, it must be shown
that ‘the position of the party to be estopped is clearly inconsistent with its
previous one; and [second,] that party must have convinced the court to accept
that previous position.”1 Id. (quoting Hall v. GE Plastic Pac. PTE Ltd., 327
F.3d 391, 396 (5th Cir. 2003)). That said, “the Supreme Court has refused to
‘establish inflexible prerequisites or an exhaustive formula for determining the
applicability of judicial estoppel,’ stating instead that different considerations
‘may inform the doctrine’s application in specific factual contexts.’” Reed v.
City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc) (quoting New
Hampshire v. Maine, 532 U.S. 742, 751, 121 S.Ct. 1808, 1815 (2001)). Even
when serving as the basis for a summary judgment ruling, a district court’s
judicial estoppel determination is reviewed for abuse of discretion. Kane v.
Nat’l Union Fire Ins. Co., 535 F.3d 380, 384 (5th Cir. 2008). “A district court
abuses its discretion if it misapplies the law or bases its decision upon
erroneous findings of fact.” RSR Corp., 612 F.3d at 859.
After thorough review of the record, we can only conclude that Aldous
never took the position (let alone “clearly”) that her defense costs in the
underlying suit were limited to $668,068.31 and that the prior court never
accepted such a position. The district court’s contrary determination
represents an abuse of discretion.

1 Though not relevant here, we also typically ask whether the party to be estopped
acted inadvertently. Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011) (en banc).
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During the prior proceedings, BAM was required to show how much it
expended both in prosecuting its claims against Hill and in defending against
Hill’s counterclaims. The parties stipulated that these attorney’s fees could be
established through declarations, and BAM’s attorney filed a series of relevant
declarations (the “Loewinsohn Declarations”). The first of the declarations
makes it plain that BAM did not claim its costs of defense were limited to
$668,068.31. Therein, Loewinsohn asserted legal fees of $2,054,178.18,
including both affirmative and defensive claims. He expressly declared that
the “fees and expenses can all be allocated either to the prosecution of BAM’s
breach of contract claim or to the defense of the counterclaims and affirmative
defenses asserted by the Hills, which was necessary in BAM’s prosecution of
their claim, or both.”
That first declaration was filed on April 29, 2011. After that day, the
rest of the litigation concerned only Hill’s counterclaims. On June 29, 2011,
Loewinsohn submitted a “supplemental declaration” that further testified that
“for the time period of May 1, 2011 to June 24, 2011, for the defense of the
Counterclaims,” $668,068.31 had been reasonably expended. Then, on
January 9, 2012, he submitted a “second supplemental declaration” which
“incorporated by reference” the first and reiterated his opinion “that an
attorney’s fee, including expenses, of $668,068.31 was a reasonable and
necessary fee for the defense of the Counterclaims.” As can be readily seen,
mere recitation of the Loewinsohn Declarations establishes that Aldous never
claimed that defense costs totaled $668,068.31. Rather, the fees incurred after
April 29 totaled $668,068.31 and were purely defense-related.
Two other notable facts emerge from the declarations and a review of the
prior proceedings. First, the reason that fees incurred after April 29 related
solely to defending against Hill’s claims is that BAM’s affirmative claims had
already been litigated. An evidentiary hearing commencing April 20th
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resolved those claims. Second, the lion’s share of dispositive defense work was
done prior to April 29, as shown by the judge’s ruling that, with one exception,
all of Hill’s counterclaims “were legally barred based on her prior rulings”
stemming from the April 20 hearing.2
The district court’s ruling contains several errors. Most fundamentally,
the district court unjustifiably read the supplemental declaration in isolation.
It took as Aldous’s binding position that defense costs in the prior proceeding
were incurred only between May 1 and June 24 and that those costs totaled
$668,068.31. To make this large error, the district court was required to make
small antecedent errors.
For example, the district court refused to credit Aldous’s argument that
the first declaration did not segregate fees and therefore included costs related
to defending against Hill. In the district court’s view, this argument was
undercut by the fact that “Loewinsohn segregate[d] the fees associated with
the affirmative and defensive claims in his supplemental and second
supplemental declaration.” Charla G. Aldous, P.C. v. Darwin Nat. Assur. Co.,
92 F.Supp.3d 555, 566 (N.D. Tex. 2015). Loewinsohn’s newfound ability to
segregate fees is easily explained, however. As mentioned above, after June
29 the only remaining work to be done was defense work.
Further, even the district court’s interpretation of the supplemental
declaration ignores its plain language. The supplemental declaration
establishes fees incurred “for the time period of May 1, 2011 to June 24, 2011.”

2 That is not to say that the lion’s share of defensive costs were necessarily incurred
during that time. The cost of the defense work done during that period is a disputed question
of fact. And, as will be seen later, we reject Aldous’s argument that Darwin must pay all
costs of prosecuting BAM’s affirmative claims to the extent the costs were “inextricably
intertwined” with the defense. It does, however, vindicate Aldous’s position, taken early in
the coverage dispute, that the April 20th hearing, though ostensibly intended only to resolve
BAM’s affirmative claims, would serve as the proving ground for BAM’s defense as well.
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When Aldous pointed out that the declaration was time-limited, the district
court closed its ears and refused to consider the point. See id. at 566 (“The
purpose of judicial estoppel, however, prevents Plaintiffs from taking positions
such as this one.”). As the district court saw it, judicial estoppel itself
precluded Aldous from explaining her prior position. It should go without
saying that judicial estoppel cannot be applied to the question of whether
judicial estoppel applies. Aldous should have been permitted make arguments
reconciling and harmonizing the declarations.3
We also cannot condone the district court’s approach to the second aspect
of judicial estoppel—whether the first court accepted the prior inconsistent
position. To find judicial estoppel applicable, the district court was required to
find that the prior court accepted $668,068.31 as BAM’s total costs on defense.
Instead, the prior court issued a judgment “[t]hat BAM shall recover from Hill
III its reasonable costs and fees in defending against Hill III’s counterclaims
in the amount of $2,586,560.11.” (Emphasis added.) As Aldous argues, this
single sentence from the judgment demonstrates that judicial estoppel was
improper.
Nonetheless, the district court found that the “record clearly reflects the
court’s acceptance of and reliance on Plaintiffs’ prior position in the Hill
lawsuit.” Charla G. Aldous, P.C., 92 F.Supp.3d at 568. The evidence cited by
the district court does not show that the prior court accepted $668,068.31 as

3 The district court’s interpretation of the Loewinsohn Declarations requires the
acceptance of a very unlikely fact—that BAM did not spend any resources defending against
the counterclaims until May 1, 2011, even though Hill filed the counterclaims on February
15, 2011. The district court had an explanation: “Hill filed his counterclaims on February 15,
2011, and Aldous provided notice of this counterclaim to Darwin on March 9, 2011. . . . Thus,
Loewinsohn’s estimation that his work for defense occurred between May 1, 2011–June 24,
2011, is not unreasonable, despite Plaintiffs attempt to make it appear so.” 92 F.Supp.3d at
566–67. Without remarking on whether this reasoning is plausible, we note that it includes
a clear error of fact. Aldous provided notice of the counterclaims to Darwin on February 17,
2011, a mere two days after Hill filed them.
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the full measure of defense costs. It shows the parties agreed “to be bound by
[the prior court’s] attorney’s fees determination” and “agreed that they would
submit the issue of attorney’s fees to [a magistrate judge]; that they could
appeal only to [a district court judge]; and that they would not request an
additional evidentiary hearing before [the district court judge].” Id. The
relevance of this procedural background and summary of the parties’
agreements is unclear. What is clear is that the district court erred in
assessing the evidence.
Judicial estoppel is an equitable doctrine concerned with “judicial
acceptance of an inconsistent position in a later proceeding [that] would create
the perception that either the first or the second court was misled.” Reed
Elsevier, Inc. v. Muchnick, 559 U.S. 154, 170, 130 S.Ct. 1237, 1249 (2010)
(quoting New Hampshire v. Maine, 532 U.S. at 750, 121 S.Ct. at 1815).
Nothing in the judgment issued by the prior court would suggest that Aldous
should not be permitted to claim defense costs in excess of $668,068.31.
Indeed, the judgment suggests defense costs far outpacing that figure. Any
inconsistency of rulings was confected when the district court estopped Aldous
from claiming BAM’s costs on defense exceeded $668,068.31. We now undo
that error.4

4 Darwin asserts that collateral estoppel also applies because “[t]he amount of fees
and expenses reasonably incurred in the defense of the Fee Counterclaim that was submitted
to Darwin for coverage was distinctly at issue in the Fee Lawsuit, was in fact litigated, and
was determined” in the prior proceedings. Darwin does not point us to the specific ruling it
believes should be given preclusive effect, however. In the ordinary course, if collateral
estoppel were appropriate, we would give preclusive effect to rulings deemed “necessary to
[the] final judgment.” See Duffy & McGovern Accommodation Servs. v. QCI Marine Offshore,
Inc., 448 F.3d 825, 829 (5th Cir. 2006). Here, that would mean Aldous has already
established “reasonable costs and fees in defending against Hill III’s counterclaims in the
amount of $2,586,560.11.” Any different prior-court ruling Darwin may have in mind was
manifestly not essential to the final judgment. Fortunately for Darwin, it is inappropriate to
apply collateral estoppel against a party who did not have a full and fair opportunity to
litigate the question. See Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct. 2161, 2171 (2008).
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B. Aldous’s Claims
1. Breach of Contract
The district court granted summary judgment on Aldous’s breach of
contract claim in part because Aldous had already received from Darwin
payments in excess of its one-third share of $668,068.31 in defense costs. That
logic was predicated on the judicial estoppel ruling and no longer holds. But
the district court also granted summary judgment against Aldous for reasons
beyond the judicial estoppel ruling. Under the district court’s interpretation of
the contract, Darwin “did not breach the contract as a matter of law because
the terms of the Policy provide Defendant with discretion to determine
reasonable claim expenses.” Charla G. Aldous, P.C., 92 F.Supp.3d at 569. We
cannot agree. Summary judgment should not have been granted against
Aldous on the breach of contract claim.
“Interpretation of an insurance contract is a question of law,” meaning
our review is de novo. Tesoro Ref. & Mktg. Co., L.L.C. v. Nat’l Union Fire Ins.
Co., 833 F.3d 470, 473 (5th Cir. 2016). “Under Texas law, we interpret
insurance policies using the same rules of interpretation and construction
applicable to contracts generally.” Id. at 474. The Policy contains a promise
that Darwin will pay “all” covered “Claim Expenses.” Only “reasonable”
expenses qualify, however, and “[t]he determination by the insurer as to the
reasonableness of Claim Expenses shall be conclusive on all Insureds.” The
district court interpreted these provisions to provide Darwin with a right to
decide how much it wants to pay. And there was no breach, according to the
district court, because Darwin merely exercised that right and did not do so
arbitrarily:
Darwin’s stated reasons for making the deductions demonstrate
that it did not arbitrarily make these deductions but rather made
a determination as to the reasonableness of the Claim Expenses,
as permitted by the Policy, according to reasonable considerations,
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